UPDATE: Euro-Zone June Mfg PMI Contracts, First Time In 3 Yrs

UPDATE: Euro-Zone June Mfg PMI Contracts, First Time In 3 Yrs

(Adds detail, analyst comment.)

LONDON (Dow Jones)--The euro zone's manufacturing sector contracted in June for the first time in three years, as activity levels buckled under pressure from the strong euro, elevated oil and commodity prices, weaker global growth and tight lending conditions.

The Purchasing Managers Index for the euro zone's factory sector fell to 49.2 in June from 50.6 in May, research group Markit Economics said Tuesday. That's slightly higher than expectations of 49.1 but still indicates a contraction over the month.

A PMI reading above 50 signals an expansion in manufacturing, while a level below 50 signals a contraction.

Activity levels in three of the currency bloc's four largest economies wilted while the outlook darkened as new orders registered their largest monthly decline in five years.

But, the data showed that input and output price pressures remain elevated as manufacturers face sky-high energy and commodity costs and try to pass those costs on to their consumers.

And it's these price pressures which the European Central Bank remains fixed on, signaling that it could raise interest rates to 4.25% from 4.0% when it meets Thursday. A growing number of euro-zone politicians have warned that a rate rise will exacerbate the pain their economies are already feeling and could result in negative growth rates.

Of the euro zone's four largest economies, German manufacturing sector was the only one to show expansion over the month, with France, Italy and Spain all contracting in June.

"France is clearly heading in the same direction as Spain and Italy, which are both contracting at alarming rates," said Jacques Cailloux, an economist at Royal Bank of Scotland. "Higher interest rates will hit hardest those countries that have slowed most and accentuate country divergence. Meanwhile inflationary pressures have risen in the supply chain, but weak demand still appears to be limiting the scope to pass cost increases on to customers."

The German manufacturing PMI was 52.6 in June, down from 53.6 in May. Activity in the French manufacturing sector dropped to its lowest level since May 2005, falling to 49.2 in June from 51.5 a month earlier.

Italian manufacturing activity recorded a sharper than expected drop to 46.9 from 48.0, the lowest level since December 2001 and below market forecasts of 47.5.

In Spain, manufacturing activity sank to its lowest level since records began in 1998, falling to 40.6 in June from 43.8 a month earlier.

The euro-zone manufacturing PMI is based on data from Germany, France, Italy, Spain, Ireland, Austria, Greece and the Netherlands, which account for about 92% of the bloc's manufacturing activity.

-By Emma Charlton and Joe Parkinson, Dow Jones Newswires; 44-20-7842-9307; emma.charlton@dowjones.com

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(END) Dow Jones Newswires

July 01, 2008 04:56 ET (08:56 GMT)

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